Specialty phosphate producer Innophos Holdings Inc. reported a 70 percent drop in net income, to $17.6 million ($.81 per diluted share) on sales of $166.8 million for the second quarter ending June 30, compared to the year-ago $59.3 million ($2.74 per share) and $264 million, respectively.
Innophos CEO Randy Gress said decreased volumes reflect the continuing recession, limited reformulation, increased competitive pressure, and the inability to respond in certain instances because of the current rock cost for Mexico. “While we experienced increases in raw material costs this quarter, we were able to maintain nearly breakeven operations in Mexico under competitive pricing and lower demand conditions. Through more flexible sourcing and manufacturing, we have continued to optimize our cost positions across our system. We are continuing to run the overall business profitably despite the downside of the fertilizer market cycle and its effects upon raw material supply.”
Innophos expects its third quarter 2009 raw material cost structure on a constant volume and mix basis to be $4-$7 million higher than second quarter 2009 due to higher phosphate rock and phosphoric acid costs in Mexico and the mix of phos acid supply in the U.S. and Canada. It said about half of this increased cost will be offset by lower restructured fixed costs.
Selling prices are expected to trend down throughout the year, but cost structure for the fourth quarter 2009 is expected to remain relatively stable with the third quarter on a constant volume and mix basis.
Innophos expects the Coatzacoalcos, Mexico, complex to operate for the full year at significantly reduced levels from earlier expectations due to continued reduced fertilizer demand, increased competitive pressure (largely from China), and the inability to respond in certain instances because of the current rock cost for Mexico.
Innophos remains in arbitration with Morocco’s OCP over rock prices for 2008-2009. Innophos claims in the arbitration that OCP’s pricing actions breached the supply agreement between the parties and damaged the company. To support its duty of mitigating the claimed damage, Innophos, among other things, is buying fertilizer grade acid (MGA) to operate its Coatzacoalcos plant.
On July 17, 2009, Innophos said OCP added counterclaims asserting Innophos’s Mexican subsidiary had breached the rock exclusivity provision in the agreement by purchasing MGA for processing, breached an implied minimum purchase obligation, and improperly reduced its orders in violation of law.
Innophos told analysts that under its current contract with OCP, unless either party cancels by Sept. 9, 2009, the contract is extended for another five years beyond September 9, 2010. Innophos said its actions are still under consideration. Despite the current arbitration, the company said OCP has been a very reliable supplier for many years.
Innophos believes the more likely outcome of arbitration will be 2008-2009 rock prices below the interim prices paid for those years, and the range of any contingent liability will be between zero to $7.5 million.
In the meantime, Innophos is seeking to diversify its long-term raw material supply, with projects underway in the U.S. to debottleneck and increase production. It is also seeking to more than double the food-grade purified phos acid production at Coatzacoalcos by the first quarter 2010. In addition, Innophos continues to evaluate efforts for phos rock mineral rights in Baja, California.
Six-month net income was $47.8 million ($2.19 per share) on sales of $357.6, versus the year-ago $68.5 million ($3.19 per share) and $426.5 million.